The Daily Update - The Middle East's largest bond sale

120 years ago today, the Dow Jones Industrial Average was officially launched by Charles Dow, with twelve industrial-related company stocks at an average price of 40.98. Since then the Index has rallied an impressive 43,460%, with only General Electric remaining in the now 30-stock index; industrials continue to dominate the weighting at just under 20%.

Sticking with record breaking, in the Middle East’s largest bond sale so far, Qatar announced a USD 9bn deal; the sovereign's first issuance in five years. The order book was unsurprisingly heavily oversubscribed, at ~2.6 times.

We have been long term supporters of the sovereign's paper, not only do the issues trade at very attractive levels, but the country's financial and external metrics remain robust, especially in the face of recent low oil prices. The country has one of the lowest fiscal breakeven oil prices at USD 52.4pb (IMF) and has come on in leaps and bounds in diversifying away from the hydrocarbon sector, with only ~36% of Nominal GDP in 2015 derived from the sector (from ~50% in 2014). The country’s growth also remains strong, at 3.6% last year, despite the sharp fall in hydrocarbon prices and is the also the “richest” country in the world with ~$140k GDP (PPP) per capita. As regular readers know, Stratton Street’s Net Foreign Asset Model (NFA) assigns the country a 7 star rating, which our model projects will remain as such beyond 2020.

The new issues are rated Aa2/AA; Moody’s, the rating agency with the most conservative oil price assumptions this year, affirmed Qatar’s Aa2 rating last month, however, downgraded regional peers for example Oman. The deal was made up of three tranches, 5, 10 and 30 years; issued at +120bps, +150bps and +210bps over Treasuries, respectively. To give some perspective of how attractive these issues are, using Stratton Street’s Relative Value model, we calculate that the 30 year, which yields 4.6%, is currently 19% undervalued, after its ~2.5 point rally post issue. Whereas South Korea‘s Aa2 30yr benchmark trades at a very tight spread of +37bps, which we calculate is 10% overvalued, and yields only 1.4%; we therefore see a lot of value in Qatar at these levels.

Speaking of oil prices, Brent breached the $50 level for the first time this year. News that US stockpiles have fallen for the eleventh straight week held crude prices at around $50, as did news that Nigeria has cut production to a 20-year low. This news should no doubt remain supportive of the Gulf region and the new issue pipeline, where we look to Saudi Arabia’s impending announcement.

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